OceanFirst Financial Corp (OCFC) 2020 Q4 法說會逐字稿

Good day, and welcome to the OceanFirst Financial Corp. Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Jill Hewitt. Please go ahead.

Thanks, Tom. Good morning, and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp.

We will begin this morning's call with our forward-looking statement disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, including the risk factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements.

Thank you. And now I'll turn the call over to our host this morning, Chairman and Chief Executive Officer, Christopher Maher. Chris?

Thank you, Jill, and good morning to all who've been able to join our fourth quarter 2020 earnings conference call today. This morning, I'm joined by our President, Joe Lebel; Chief Risk Officer, Grace Vallacchi, and Chief Financial Officer, Mike Fitzpatrick. As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. This morning, we will cover our financial and operating performance for the quarter and provide some color regarding our priorities for 2021.

Please note that our earnings release was accompanied by a set of supplemental slides that are available on the company's website. We may refer to those slides during this call. After our discussion, we look forward to taking your questions.

In terms of financial results for the fourth quarter, GAAP diluted earnings per share were $0.54, a significant improvement as compared to the third quarter and an all-time record result. GAAP earnings reflect a strong recovery as credit costs moderated. Reported earnings were impacted by a variety of items as we positioned the balance sheet for 2021. As a result, we pegged the core results for the quarter to be $23.2 million or $0.39 per share.

Regarding capital management, the Board declared a quarterly cash dividend of $0.17 per common share and approximately $0.44 per depositary share of preferred stock. The common share dividend represents the company's 96th consecutive quarterly cash dividend, a 24-year uninterrupted chain of performance. The $0.17 common share dividend represents just 32% of GAAP earnings, allowing us to build tangible book value per share by 2.7% as compared to the prior quarter. There are no plans to reduce or eliminate our common dividend at the present time.

Capital levels also improved to tangible stockholders' equity to tangible assets, increasing 38 basis points to 8.79%. Please note that our balance sheet remains inflated as we carried $1.3 billion of cash at year-end and averaged over $1.2 billion of cash on hand during the quarter. As a result, asset-based ratios, including capital levels, return on assets and margins continue to be a bit distorted.

As you may recall, the company suspended its share repurchase activities in February of last year, in recognition of the unusual risks presented by global pandemic. Having completed our stress test process and having observed significantly improved asset quality measures this quarter, the company plans to recommence share repurchases immediately following the opening of our trading window next week. The company has slightly more than 2 million shares remaining in the current share repurchase program. Should our level of surplus capital support a larger repurchase program, the Board will consider an expansion to the current authorization.

Before we discuss the outlook for our business, I'd like to spend a minute reviewing market conditions in our area of operation. The pandemic continues to present the primary economic issue in our markets and around the country. While COVID cases elevated in our markets following the Thanksgiving holiday, they appeared to have peaked and are now on another downward trend. During this latest surge, the vast majority of our clients were far better positioned to navigate public health restrictions. Most continued to operate while observing state and local health protocols.

Our core markets continue to benefit from migration from the urban centers in New York and Philadelphia. Local real estate markets are strong and seasonal businesses expect to experience a robust summer season in 2021. Of course, the ultimate course of the pandemic will be determined by the pace and efficacy of the vaccination effort. While vaccination efforts have been far less than ideal, momentum is building and the traditional summer season is concentrated in July, August and September.

We remain hopeful that a combination of our customers' innovation, strong public health protocols, warmer weather and some progress on the vaccine front will provide a summer season that should be at least as positive as the 2020 summer season. Advance bookings along the New Jersey shore are quite healthy and support this outlook.

Turning to the bank, I'd like to review asset quality metrics, which are evidencing strength at year-end. The forbearance loan process has largely concluded, with just $31 million of loans under full payment forbearance or less than 0.004%. Included in our supplemental slides is a breakout of loan portfolio by payment structure that details that approximately 97.1% of the entire loan portfolio is paid current and in full compliance with their pre-COVID payment terms.

Delinquencies remain low, but increased slightly during the quarter. Since year-end, more than half of reported delinquencies or $17.9 million of loans resolved and are now paid current. Net charge-offs were also modest at $2.9 million, with almost 80% of charge-offs related to the sale of higher risk residential and consumer loans.

Considering our decision to accelerate the resolution of high-risk loans via loan sales in 2020, net charge-offs totaled a modest $18.9 million or 23 basis points for the entire year. Bear in mind that our accelerated resolution strategy of selling higher risk loans accounted for $16.5 million or 87% of net charge-offs for 2020. Having worked aggressively to resolve our forbearance loan portfolio, we are pleased that nonperforming loans at year-end totaled just 47 basis points of total loans and nonperforming assets totaled just 32 basis points of total assets.

Just one last note regarding asset quality. The bank proactively manages credit risk and has always promptly identified loan pools for additional monitoring. From time to time, this results in additions to our special mention and substandard loan portfolios. Proactive management often reduces credit losses, and we are not concerned about the slight elevation in these portfolios as we work through the remaining portion of the pandemic.

By comparison, in the Cape Bank and Sun National Bank acquisitions, we downgraded over $100 million worth of loans in the first year following the acquisition. By working our progress, the vast majority of the downgraded Cape and Sun loans recovered or paid off without loss to the bank. In fact, gross charge-offs for commercial loans related to both of these acquisitions totaled just $3.6 million over the following several years. With forbearance behind us, the COVID-driven special mention and substandard portfolio should moderate over time.

In terms of the income statement for the quarter, core earnings recovered nicely as credit provisions normalized. GAAP earnings included the costs associated with retiring all of our remaining Federal Home Loan bank borrowings, as well as gains related to the sale of PPP loans and investment gains in a dividend-focused equity portfolio. I would like to call attention to our comments in the earnings release, which note we opted to realize our gains in that equity portfolio by liquidating it in early January. In addition to the gains recognized in the fourth quarter, we expect to report an additional $8.1 million in gains from this portfolio in the first quarter of 2021. We have now completely exited these positions.

Expenses during the fourth quarter were elevated due to a combination of unusual factors, which added $1.3 million to operating expenses. We continue to focus on the absolute and relative level of operating expenses, with core operating expenses having decreased by 25 basis points over the past 4 quarters to 1.8% of total assets. Our efficiency ratio has crept up, but the driving force behind that is the flat yield curve, compressed margins and pressure on the revenue side.

Regardless, we continue to sharpen our focus on operating leverage and have announced another 4-branch consolidations, which will be completed in early April following the required customer notification time line. Now we'll bring our branch consolidation count to 57 since we began this program and should drive average deposits per branch to more than $160 million.

Going forward, the path to building earnings momentum is squarely focused on deploying the $1.2 billion of cash to improve both margins and aggregate net interest income. The mix shift, which will take several quarters to complete, can make a material difference. With ample capital levels, a loan-to-deposit ratio of just 82% and no FHLB advances in the balance sheet, we have the fuel to drive earnings improvements over time.

At this point, I'll ask Joe to walk you through our plans to deploy cash and improve margins.

Thanks, Chris. I'll start with the net interest margin, which was unchanged quarter-over-quarter at 2.97%. As Chris noted, we have over $1.2 billion in cash we need to deploy, which we expect to do over the next 5 to 6 quarters. We estimate excess liquidity of $1.17 billion, which has a drag on NIM of 36 basis points. The NIM also includes 24 basis points of purchase accounting accretion, up 7 basis points quarter-over-quarter, while prepayment fees were minor in both quarters, leaving the core NIM down 8 basis points. This should be the trough in the NIM, which primarily remains impacted by our large cash balances.

Paying off the Federal Home Loan Bank advances in Q4 should benefit us to the tune of 10 basis points in 2021, and we continue to work down the brokered CDs we raised early in the pandemic. At the end of Q3, we had about 275 million brokered CDs and ran off $108 million in Q4. In Q1 and Q2, we will see another $156 million with a weighted average rate of 1.14% leave the balance sheet. Excluding the brokered CDs, I expect another $493 million in CDs, with a weighted average of 1.66% to either renew at a much lower average rate or also exit the balance sheet.

For the year, organic deposit growth of $1.51 billion included several wins of high-profile 9-figure corporate treasury accounts, reflecting the maturity of the treasury area we began just a few years ago. Our team and product set rival any competitor and will allow us to continue to be aggressive in reducing rates on CDs and other rate-sensitive accounts with maturing rate guarantees in 2021. While we reduced deposit costs from 49 to 45 basis points in the quarter, we expect to continue to improve markedly in the coming year.

Loan originations set an all-time high, excluding PPP loans, while commercial activity was muted in the second half of the year after a strong start, due largely to the pandemic. Residential lending remained a bright spot with record highs in originations. As we head into 2021, the overall pipeline for the bank remains largely unchanged from Q3. But importantly, commercial activities began to increase. All regions of the bank, New Jersey, New York Metro and Philadelphia are seeing pipeline improvements and anecdotal bullish news from clients. Competition is fierce, and rates are squeezed due to the liquidity on many bank balance sheets as lenders rush to deploy their cash.

Our residential business remains brisk, even in this typically seasonal time. And we expect continued near record volume in 2021. We also expect to sell a significant amount of 30-year conforming originations to take advantage of the robust secondary market. While we hold to the credit standards and appetite we have long set for the bank, we are also continuing our recruiting efforts by adding several commercial bankers in Q4 and currently recruiting aggressively in our core and adjacent markets. There's no shortage of opportunity for talent, and we expect significant hires at the beginning of Q2 and through Q3. We are recruiting team lift-outs and individual bankers in vibrant markets, as we have done successfully in New York and Philadelphia, and are also adding to existing teams. I will provide you with an update on our progress next quarter.

Outside of the proactive stance on the sale of high-risk underperforming loans and robust sales of recently originated residential loans, we see little paydowns outside normal amortization on credits that we've acquired or didn't meet our standards. It's hard to derive any trends from the acquired banks other than the impact from the pandemic as a possible cause of lower churn. However, given recent return of aggressive pricing and terms from competitors in the market, we need to be diligent and remain focused on our client relationships.

Before I turn this back to Chris for some Q&A, I'll note that we remain focused on our ability to deploy our excess cash in the coming quarters and grow the loan portfolio diligently. Short term, headwinds will include the sale of our newly originated residential loans and normal amortization of that book. We've looked at loan pools to buy, as we've done occasionally. But pricing for pools lately has been very aggressive, so much so that pursuing very low returns, longer duration risk, given the fluctuating long-term yield curve, puts under pressure on the balance sheet. But we remain upbeat in the increased commercial activity and our recruiting efforts for lenders.

With that, I'll turn it back to Chris.

All right. Thanks, Joe. At this point, we'll turn to the Q&A portion of the call.

(Operator Instructions) The first question comes from Russell Gunther with D.A. Davidson.

Just a follow-up on Joe's comments regarding the LPOs and team lift-outs. I understand we'll get more of an update next quarter. But I was curious on 2 fronts. One, I think you mentioned contiguous markets. And so I'm curious as to what that means from a geographic perspective? And then two, do you have a kind of loan growth target in mind for the back half of the year?

So I think, Russell, for us, we've always described our adjacent contiguous markets as places that we can drive in a day. So I think the approach I'd take is that we are adding -- we added 3 additional lenders in the fourth quarter in existing markets, including 2 in the new North Jersey LPO, which has just gotten its office space and should be up and running. And we expect that we'll continue to add in the existing markets. And we're just looking for vibrant markets as we've done. We focus on acquiring the talent first and the talent sort of dictates to a certain extent where we go. So we're pretty bullish upon that. And I can give you any other feedback, if you'd like.

And then on the second piece, I think you're right. The second half of the year, I expect that we should be able to drive 9-figure growth every quarter in portfolio. I think early in the year, we want to make sure that we focus on what we've done most recently, which is identifying the credits appropriately in the acquired banks, making sure that we support all of our clients that we've done through the deferral progress or process in the PPP loans and making sure that we get through the pandemic the way we want. But we're bullish on the second half of the year in terms of loan growth.

Great. And then switching gears to the margin. Looking at the deck that you guys put out with earnings, a very helpful glide path in terms of what happened this quarter. Hoping you could extend that into 2021, talk about how the average earning asset remix you plan to undertake will play out from a margin perspective?

I think there's kind of 2 keys to the margin story for us. The first, as Joe mentioned, we have a lot of deposits repricing, especially early in the year. So we have lagged many of our peers in the speed with which our deposit rates have come down. You'll see us catch up in that, I think, early in the year. But that will be helpful on margin. It's going to be more of a funding story than an asset yield story in the beginning of the year.

The other thing is the FHLB advances were paid off mid-quarter. So we'll get a full quarter's worth of benefit as we go into next year. I think as the year develops, then the story is going to shift more to an asset-based story, where you see that cash deployed. All of that cash is currently at the Federal Reserve. So you're earning somewhere in the range of 10 basis points on that. So I can't give you a specific glide path, we don't provide guidance on future margins. But I do think, to echo Joe's comments, we believe that Q4 was the trough and that margin expands from here.

And then last question for me is on the expense side of things. So I got the expectation around the incremental branch reductions. I think the system conversion for Country Bank is in the first quarter. Could you talk about your expectations for core expenses over the next few quarters and the ability to target and achieve positive operating leverage for 2021?

Okay. So a couple of things there. The -- as we go into 2021, we made a comment that we had a couple of unusual items in Q4. Things like our FDIC assessment were elevated and that was just a reflection of -- if you recall, in Q3, we've moved a significant portfolio of loans to held for sale and downgraded them to nonperforming at the time. That drove the technical ratio around nonperforming assets up and increased our FDIC assessments with the numbers at year-end that will reverse completely as we go into next year.

So there was -- we pegged probably about $1.3 million in total of expenses in Q4 that were unusual in nature. So Q4 was a little higher than it should have looked. As we go into next year into 2021 -- or this year, I'm sorry, we are running about $1 million a quarter in COVID expenses. We expect that will moderate. That will be helpful. The second thing is the branch reductions. So the 4 branch reductions that we have there's a regulatory requirement around notice from -- based on our national bank charter. So we'll get those closed in early April. So those kinds of things you're going to see as we kind of move through the first half of the year.

I would see our overall expense horizon being relatively flattish. But if you went back and looked at your comment about operating leverage, if you looked at our core revenue and core expenses, over the last 4 quarters, we have improved operating leverage. It's just been masked a little bit by the NIM compression. So I think you'll see it continue. And we're going to continue to look at our branch network, but we're going to balance that off against the talent Joe's able to hire. So I think when we've got the full headcount and composition of the adds to the commercial bank that we'll be able to share with you in April, we could probably give better guidance around the full year outlook for expenses. But for the first quarter, I think you're going to see flattish, and we might have a little bit of a tailwind.

The next question comes from Matthew Breese with Stephens.

I got to go back to the NIM. I understand there's a 36-basis point drag from liquidity, and you're attempting to put that to work over the next 5 or 6 quarters. What is on the low end -- how much of that can you recapture over the next, call it, 5, 6 quarters? If you had to give yourself a A grade, a B grade, a C grade, how much of that do you think you could recapture through deployment?

I think when we're finished deployment, we wind up where in our historical range would have been in the low 3.20s to 3.40s, right? So I think when you're done, that's about where you get to, and at this point, I would say it'd be a pretty smooth transition over the next 4 quarters or so, depending on events, right? You may see a little bit better pickup in Q1 because of the funding issues I mentioned. And again, remember the -- Joe talked about the brokered CDs and all of that. They rolled off -- some rolled off in the fourth quarter. We'll get a full quarter benefit on those in Q1. The ones that roll off in Q1 will get a full quarter benefit in Q2. So it's really more on the funding side. But I think we believe that over the next 4 to 6 quarters, we should be stabilizing margins back to where we used to be in the low 3.20s to 3.40% range.

Okay. Great. And then more so than your peers with the proactive actions on deferrals. To me, it feels like you probably have a better outlook for the overall profitability of the bank. If we assume that we're in this interest rate environment for a while, let's just say, through 2022, maybe into 2023. In terms of ROA and return on tangible goals, could you just share with us what your outlook is and what you hope to achieve there?

Yes. A couple of things. I mean the thing I would draw a distinction on is what we're calling internally we refer to as the Iceberg issue. And the Iceberg issue is this because of the CARES Act, it was perfectly appropriate. You can restructure loans and not designate them as TDRs and all that. It makes it very difficult to understand the residual credit risk that's in any of our books. That was what kind of drove us to make sure we are disclosing a very high level, the 97.1% of loans that are paying on their pre-COVID terms. So we've not given them any concessions, they're not getting any special deals.

So we really do feel that we've got a very strong assessment of where our credit risk is. Even if you look at last quarter -- fourth quarter, I'm sorry, most of the charge-offs were related to the sale of the residual forbearance residential loans. So as we finished the consumer residential forbearance periods, we identified the high-risk stuff and we sold that off. If you take that out, the net charge-offs were actually extraordinarily low.

So as we go into '21, the other comment I'd make about kind of credit is that the forecast that we use that we put together in the fourth quarter did not account for the change in the makeup of the Senate and the potential for additional fiscal stimulus, which could be material. So as CECL works, those economic factors are big levers, and it's possible that, that would be a tailwind going forward. And then even if you look within our reserve, we still have -- a significant amount of our reserve is qualitative, not quantitative.

So your first kind of question about profitability metrics and where we're going, we're not -- pandemic's not over. We still have to work through the special mention, substandard books. But we feel we've got a very strong handle on them. In fact, in that book, 84% of that book is paid current. So these are not people that are having payment issues. I think that that's the first component, what is going to overshadow profitability in terms of provision requirements as we go forward. So we're feeling like that's not going to be an overhang that's going to hold us back.

The real second component is what happens with the yield curve as we deploy this cash. And initially, this is not unusual. Even though we saw the yield curve start -- the long end start to move up, loan rates had not really budged, right? So competitive loan rates in the markets were not moving. We think that the glide path that we're talking about in margin is it could be accomplished in the current interest rate environment. If you get any significant movement in the yield curve, it could be far better. So in that environment, we think we can build our earnings back to more than 1 ROA. And given our leverage position, we think that's -- that'll be a pretty good return on equity.

Okay. Great. And then my last one, in just regards to M&A, curious how conversations have gone this year or over the past few months, if things have -- deferrals have kind of gone down for the industry? And your expectations, do you feel like this year, assuming there's been more chatter that you might participate in M&A again?

I would have told you earlier last year, obviously, we were -- we've taken ourselves as almost everybody did, right, taking ourselves out of the market. While we assess them, the first thing is you have to know your own balance sheet, right? You can't get involved in that kind of discussion, if you don't think you've gotten everything kind of cleaned up at home. That was one of the reasons that we took such aggressive action to make sure that we were keeping our balance sheet in the position we wanted it in. And we feel highly confident that we've got a very accurate picture of where our credit risk lies and where the balance sheet is. So the first condition to even consider M&A is, I think, met.

Second condition would be, can you get a handle on other people's businesses? And as we watch the earnings season, I think you're seeing a lot of us have performed really well. Forbearances are in the right direction. I think we're at a point where you really could have visibility into balance sheets and credit quality. So I think that second condition is met.

So now comes down to, are there things to do that are both smart and actionable? And that's always a much more random event. And it depends a lot on different organizations, timing and all that. We expect that folks will be looking hard at strategic alternatives probably in the first half of this year. We expect to be doing that as well. If we can find something that adds value for our shareholders, there's nothing stopping us from doing something immediately. That said, we have $1 billion worth of cash to deploy. We can lever earnings. We don't need an acquisition to help drive efficiencies or earnings. So we don't feel pressure to do it. But I think that as an industry, we've got the conditions to consider that now.

(Operator Instructions) Our next question comes from Christopher Marinac with FIG Partners.

Chris and team, I know it's been almost a year since the pandemic started, and you were one of the first banks that recognized the risk. So just kind of want to circle back on what has to happen to reverse some of the criticized and classified loans? Do you think some of that might start happening this quarter? Or will it take longer for that to unwind and therefore, influence reserves as you were talking about earlier?

So look, I mean, the first is we don't feel that there's going to be a lot of pressure on reserves there based on our assessment of things like LTVs and the payment currency and all that. I think it's going to be a methodical process, where you'll see it come down a little bit in each quarter. And then if you fast forward a few quarters, it will become much less significant. These are really pandemic-driven decisions. Where people are okay, we can see that they have a source of payment for us, but they were weakened, right? I mean if you don't think that people would be weakened after a pandemic, you're probably in the wrong business. But Grace, I know you've got some very good kind of granular data around LTVs and segments. So maybe you could just share that with Chris.

Sure. So in the special mention and substandard book, the special mention portfolio has an LTV of less than 60%. And in substandard, it's around 50%. And as Chris mentioned earlier, 84% of those loans are performing as agreed with pre-COVID terms. Said differently, only 16% are past due on nonaccruals for our PCD loans. So I think the point there being that demonstrates that we're pretty rigorous in evaluating the risk in our credit, it doesn't necessarily mean that they can't pay us. It's just that there's an indication of some sort of weakness, some impact from COVID.

I think if you think about the loss given default in those segments, given where the LTVs are and given our execution even on loan sales, which we think was certainly liquidity discounts that you had this year trying to sell loans during a pandemic, we don't think there's a lot of loss content there. And the reserve already accounts for this migration.

Got it. That's helpful background. And Chris, just a big picture follow-up. As you've built the digital bank for OceanFirst the last several years, what have you not done just in terms of functionality? Is there anything that you haven't yet accomplished on that? Or do you feel like you are where you want to be with the digital processes?

Well, there's a couple of different parts of that. I think in digital products to support our customers, we feel we've got a very competitive and highly effective suite. So our customers can do anything they can do with most -- any bank, including the major banks in the country. I think now from this point forward, the investments are going to be focused in 2 areas that may be less apparent or less obvious. First is the business process automation and so that provides efficiencies to the bank. So what can we do to help our employees be far more effective and efficient. That may not be as apparent on the outside, but that's important in terms of the way the customers look at the world as well.

And then the second thing is, I think many banks, including us, are grappling with in the digital future, how do you attract net new customers into your bank? And one of those last bastions of value we have in our branch network is that it brings us new customers each and every day. So we've been working on digital distribution, that kind of sales side. And it's more than having online account opening. We have a great online account opening product set. You can open an account in 6 minutes and plenty of people do. We've got significant increase in those numbers over the past year. However, there's still a lot of folks who would go first into a bank branch. And I think that's the last horizon.

So I think in terms of maturity, we think feature functionality for our customers is terrific and on par. We need to match that kind of capability for our internal customers, our employees, so they can do things faster and more effectively. And we have to crack the code, and it's more of a marketing or a marketing scale issue than a digital issue. It's how do we get customers to come to OceanFirst and open their account just over a mobile device and those kind of things.

The next question comes from Frank Schiraldi with Piper Sandler.

I just -- I had a follow-up on M&A. What is the wish list in terms of what makes the most sense, what is most attractive? Is it potential MOE in New Jersey? Is it an add-on deal? And if so, what geography?

So, Frank, after each acquisition, we do a post-acquisition review about a year after the acquisition, where we kind of sit with the Board and we talk through what went well, what went according to expectation, what didn't and having now 7 of them under our belt, we can tell you a few things that are probably obvious. But first, anything you do in market is the best thing you can do. So building your own market share. The second thing is, anything you can do with a company that has a pre-deal competitive performance ratios, good margins, return on assets, credit expenses, the better the business is before you do anything with it, the better it's going to be afterwards. It's not the rocket science.

So we have a hierarchy. We have whole strategy weighed out. If we can do an in-market commercial bank combination with a company that has -- is like-minded in the kinds of customers we're going after, that has good margins and good earnings and when you take the combined operating expense out, it's a home run. And whether that's an acquisition or a merger or an MOE, that's the best thing you can do.

And then I'd just add to that, in terms of scale, obviously, the larger the scale of that opportunity usually correlates with the bigger opportunity to provide earnings per share increases for your shareholders. And then you start to -- it's kind of like peeling the layers of the onion, right? As you go out from that, contiguous markets are okay, but there are a little -- not as many expense saves. If the business model isn't exactly like ours, then maybe you have to do some work around whether it's funding or lending. So as you start to drift away from that, things get to be less appealing.

But we think about them in terms of those things. What are the performance characteristics of the combined entities, whether that's a merger or an acquisition? What are your ROAs? What are your margins? What are your ROEs? We look at the earnings lift, the raw EPS increase for our shareholders. We look at the price earnings after cost saves. And those are the most important things we look at.

There's a lot of talk about in the industry over the last few years over earn backs and all that. Earn back is important to us. It is a guideline that we want to stay within or a guide rail, but it doesn't drive what we want to do. What we want to do is find like-minded businesses in the same market or overlapping or contiguous markets. And we think that provides the best benefit. So -- and we've always been very tolerant of looking at a wide variety of options. So we keep that scan open. We cast a wide net. And if the opportunity comes up, we feel comfortable moving forward.

Okay. And then I guess, same sort of question on the organic side. If you think about loan growth coming back, particularly in the back half of 2021, where is the most interest? I mean is it just primarily in C&I? Is there areas of CRE that are particularly interesting, given maybe rates are going to be low for a while and you can lock in some spread? What's of most interest here in this environment?

I think for us, Frank, look, we're amenable to pretty much any kind of growth. I know that sounds a little open-ended. But I'll phrase it like this. I think there are many banks that have CRE concentration concerns. We don't have any of those. I do think that there are pockets that everybody's identified already, the industrial, the warehouse, that last-mile logistics type of CRE that has value to -- for many folks it's a very competitive market in arena, refrigerated storage, things like that, that we all like, that we don't have any restrictions on chasing. So CRE, on an overall basis, there's nothing holding us back from doing any of that.

And with the swap product that we've been very competitive within the last 2 years, it takes some of that long-term vanilla fixed rate duration risk off the balance sheet. So you do get a little bit possibly in the lower spread of origination of loans, but you're getting that swap fee income early in the process, which is good. And I do think that we'd like to do and recruit as much C&I lenders and do as much C&I business as we can, but we're also pragmatic. There are many of those lenders in the marketplace that are trying to do the same thing because they have CRE restrictions.

So it does give me the flexibility to go where the opportunities are. And I think as we recruit people and then lean on our existing teams, that we'll benefit on either venue. And I'm not restricted in either what I'm looking for, duration, rates or terms as long as we stick to our credit appetite. And I will mention, interestingly, you saw, the announcement has the commercial pipe's share over $200 million at the end of Q4. It is up markedly since then.

Okay. And then just last question. I thought it was pretty interesting, the gains in the equity portfolio. It worked out well. Just wondering if given where rates are and kind of the need for yield, if that's sort of a one and done, or if that's something you guys will look to as a way to deploy cash in the future? And then I know it's not exactly the same thing, but just kind of how you weigh that against sort of an investment in yourself through a buyback?

No, it's a -- I would consider that to be an unusual opportunity that is more of a one and done. And let me just give you some color around it. After we did our capital raise in the beginning of 2020, we wound up with a very significant excess cash position at our holding company and started to make some investments in firms and started with subordinated debt and other things in firms that we felt highly comfortable with, we felt we understood, had a little better than market knowledge about credit discipline and underwriting and all that. Those worked out well. We had a significant number of gains around just the debt instruments.

And as we were searching for yield, we pulled a playbook out of kind of our history. In 2008, we did a very similar thing. We identified a series of firms that had very high dividend yields where dividend payout ratios were modest and where we felt we had a pretty good sense as to the strength of the balance sheet. And it was -- we entered into this to buy yield, and that portfolio actually had a yield well north of 5%. We expect it to be in that portfolio at a 5-plus-percent yield for quite some time. What happened thereafter was the -- look, the markets took off and the instruments that we chose appreciated in value very rapidly and very significantly.

So what happened is they drove the effective yield of those securities down much lower than the original strategy. So once the yield got low enough, you look at it and say, I don't want to have the volatility on my balance sheet. I bought this for yield. The yield is now low. We've got a gain position. Why don't we convert it into tangible book value, get it into the balance sheet, take the risk off, and we'll find other things.

That said, Frank, we are looking at a slightly wider variety of strategies to deploy our cash than we might have just a few years ago. We have a much more mature treasury group, and we're going to be methodical and thoughtful and conservative. But we are looking at other ways to deploy that cash because we think it's going to be around for a while, not just through the loan book. We focused a lot on the loan book today, but we're also looking at the investment portfolio. That said, we think that fixed income securities may not be the ideal place to be playing these days, so we're being very careful.

The next question comes from Erik Zwick with Boenning and Scattergood.

First, I wanted to start out, I guess I've got kind of 2 questions just on the new recruiting efforts. And Joe, you mentioned a little bit of this in maybe one of your prior answers, but I think in your opening remarks, you said you're aggressively recruiting today. So I imagine you have some sort of criteria that you're looking for. So curious, one, if you're targeting either certain individuals that you've known from the past or maybe more generally just lenders with specialties and any particular asset classes? And then I guess the second part of the question, are you finding any commonalities in the organizations that you're having success recruiting these individuals from?

So thanks, Erik. I'd say that's much like we do, we have a stable of candidates that we have on our radar that we've had for a period of time that we always talk to and sometimes things are right for people and sometimes they're not. We've been fortunate in the recent periods to recruit these folks. And I continue to see a significant interest in people that are -- even those that are not known to us well receptive to having conversations, which is really valuable. And I think that's part of what we built here.

And I think that there are no restrictions, we -- as I mentioned earlier, in terms of asset classes, I'm happy to recruit C&I or CRE lenders. There's nothing that I'm staying away from. I truly appreciate people that have specialty niches. I always find that fascinating, especially in a rate environment like this, if there's a way to differentiate ourselves, so that's to take the undue risk, I'm happy to do that.

And I will say that we tended to recruit from larger organizations and largely because I find that those lenders, historically, we tend to recruit seasoned lenders. And those lenders from larger companies tend to have not only the sales activities, but also the credit background and training. That's really valuable in a company like ours, in the way we underwrite and the way we'd look at credit. And that's been something we're recruiting from larger companies typically, and I don't see any shortage of qualified talent. So that's a good problem to have.

I agree. Yes. Great color there. And then just the last question I had today. With regard -- curious about your approach to the new round of PPP, given that you sold substantial balances from the last one. Is it safe to assume that any interest you're getting from current customers, you maybe are referring to a third party? Or I'm just curious how you're approaching it at this point?

We're actively lending to that group. So the customers that we have that have a need, we're certainly lending to. The folks that we sold in the last round, part of that sale was they will continue to service additional requests from those customers. So we have it a little bit bifurcated. The ones that were sold are being handled by our third party we sold those loans to. Any loan that we didn't sell, which is probably a little less than half of the book, those requests are coming directly to us.

What we're seeing and what we're hearing from our peers is, and I think this is a good news item, the SBA put this new rule in saying you've to have a 25% diminishment in revenue to qualify for the new round. And very few people are actually qualifying for that. And I'll turn that around and say, that's a great thing, that we have fewer kind of desperate businesses out there that have had that kind of significant impact. So we've got them. We're processing them. It's a relatively smooth process at this point, straight in, automated it into the SBA. I don't think it's going to be giant numbers for us. It may not be, I think industry-wide is big -- anywhere near as big as the earlier round. So it's going on, and we're meeting the need, but it's not going to be a big number for us.

The next question comes from William Wallace with Raymond James.

Just 2 quick kind of housekeeping questions, but as a quick follow-up on that PPP question. What are the balances left at the end of the year? And then also what was the NII and net interest margin impact from the PPP loans during the fourth quarter?

Yes. The balances at the end of the year were below $100 million. So the impact going forward would be relatively nominal. We sell in the deck that when we sold off the PPP loans, those are relatively low rates. So they accreted the NIM during the quarter by about 9 basis points.

Yes. Okay. And then do you guys have any determination as to whether you will be able to push off the impacts of the Durbin amendment since you crossed $10 billion in 2020?

Yes. So we're still awaiting kind of final guidance on that. If you read the interim guidance that's come out, there is a path where we might not be subject to Durbin, but there's also an interpretation that would allow the Federal Reserve to determine on a bank-by-bank basis whether they want to impose that or not impose that. And we're -- as you can imagine, we're in contact with our regulators to try and understand what the final determination will be for us. We crossed $10 billion on January 1. So we're kind of an odd duck.

And the interpretation says if you were driven by the pandemic to cross $10 billion. While that wasn't the direct case for us, there is a secondary argument, which is absent the PPP loans in the pandemic, we might have chosen to duck assets under $10 billion for year-end again and did not have the opportunity to do that because of the pandemic. So that's an ongoing conversation. I can't give you any better guidance than that.

I don't know if you guys are tracking it, but there was a bank in Tennessee that crossed over $10 billion due to an acquisition, and they announced on their earnings call yesterday, I believe it was yesterday, everything blends together -- this week that they were -- the regulator said they would give relief. If you're tracking that, did that give you guys hope that you'll qualify as well or...

I think hope is a good term. And one of the great aspects of our Federal Reserve system is it's a -- we have a central bank that's not a central bank. So it's made up of 12 different banks. And there are times when it's easy to get a consistent answer across all 12 banks and times you just have to work through the process. So -- but that did give us hope.

And Wally, the PPP loans on the 12/31 was $95 million on our balance sheet, and that's been running down as they're forgiven.

(Operator Instructions) As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Christopher Maher for any closing remarks.

Thank you. With that, I'd like to thank everyone for their participation on the call this morning. We remain focused on building the business, deploying that cash and improving earnings. We look forward to discussing our first quarter results with you in April. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.